After 20 years this paradox is finally getting the attention it merits from participants in the UK debt capital markets as all players - government, regulators, issuers, banks, and platforms - wake up to the implications of the unfairness that characterises access to the corporate debt market.

How to bring retail investors back into this market was the focus of an event that PrimaryBid recently hosted at the London Stock Exchange where we launched a white paper, co-authored with Simmons & Simmons. 

Speakers from across the industry were in agreement that the bifurcated corporate debt market that exists in the UK today (and in the EU, for that matter) needs reform - “one bond, one market” as one speaker put it.

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Extending the benefits of an existing bond market through greater inclusion

This is not about disrupting the institutional bond market - it works well, providing issuers with a reliable source of financing for their corporate growth plans and institutional investors with access to an income-generating asset class with a broad range of duration and credit risk features to meet all appetites. The shared goal of those in the room at the LSE is to extend the benefits of that market to a wider range of investors.  

It was clear from the discussion just how much non-institutional investor demand is out there, if this market can be opened up. Consider: £300+ billion sits in UK Cash ISAs alone, being eroded by inflation, but with these savers not feeling able to take the plunge to equity investment. Could fixed income investment attract them to invest? 

Wealth managers will appreciate direct access to corporate bonds of different maturities and yields from which they can construct portfolios for their clients (particularly where the issuer is a firm they have already researched and grown to understand from investing in its equity). 

And retail investors, whose interest in fixed income has been re-ignited by higher base rates, will welcome being able to invest in an asset that is easy to understand, that they can hold to maturity, and that comes with a predictable flow of returns.  (And if the issuer is a name they know, respect, and feel an affinity with, then even better).

Just as PrimaryBid has done in the equity market (see our 2023 white paper with New Financial for more on this) in delivering retail investors access to IPOs so we will use our technology solutions, our market experience, and our public policy insights to bring the same spirit of democratisation to the debt markets. We’ve already made real progress on improving retail access to government debt with our new T bills service, but we want to extend this to the corporate market.

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Regulation has hampered participation

The way this market works currently, with non-institutional investors shut out, was never a conscious choice by either policymakers or market participants.  It emerged as an unintended consequence of efforts to do the right thing.

A generation ago, in the name of investor protection, new requirements were introduced that were designed to ensure that retail investors received all the material information they could possibly need to enable them to make an informed decision on whether to invest in a corporate bond.  But the provision of this material was not cost-free and issuers and their advisors concluded that the hurdles associated with issuing bonds accessible to retail investors outweighed the benefits; by focusing on much larger denomination bonds that were really only ever going to be suitable for institutional investors, issuers could continue to meet their financing needs and reduce the burden of their issuance program.

Even as they were cut off from direct access the appetite of the UK retail investor for bonds remained. While market cycles and nominal interest rates caused demand to ebb and flow, retail investors still wanted to access fixed income, as the persistent appetite for bond funds demonstrated.  

But why should an investor, seeking to get exposure to this asset class, be obliged to access it through a fund, rather than being given the opportunity to buy the same underlying instruments directly?  Able to invest directly and without friction in equities (let alone in riskier assets, such as crypto) it seems increasingly indefensible that the retail investor wanting to access the bond market is denied the chance.

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Technology and policy are building blocks for greater inclusion

Fortunately the prospects for change are improving, with two key building blocks for retail inclusion being dropped into place. 

First, technology to support retail access now exists and so participants in the market today (issuers, banks, institutional investors) can be confident that this new category of investors can be brought in without impeding the functioning of the existing market.

Second, public policy is shifting in the right direction. There is cross-party support for championing the opening up of markets to retail investors and encouraging households to put more of their capital to work in risk-based assets that will both support UK growth and enable people to grow their capital for the long term. Consistent with this the FCA is actively looking again at many of the rules in this area - the Prospectus Regulation for example - to see how the regime can be improved.

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‍Improved investor access isn't just an option, it's an imperative

But we are not there yet; there is work still to be done.  Speakers and panelists emphasised the need for market participants to remain engaged in the regulatory and policy debate, both responding to formal consultations on the technical detail and being vocal and public about the case for change.

At the same time, everyone agreed the market also needs to look at its own practices and procedures, to get match-fit so that when the regulatory framework changes the right infrastructure is in place.

We need the market to be ready to support issuers to offer lower denomination bonds to non-institutional investors and to provide those investors with a frictionless and easily navigable means of accessing the assets.  Whether that be investing in best-in-class technology, improving the quality and availability of data to help investors stay informed, or providing educational material about fixed income to grow the market over time, there was unqualified support from those in the room that we will only realise the full potential of this market if everyone plays their part.

The energy and enthusiasm that we saw in the room at the LSE suggests that PrimaryBid is not alone in being ready to make 2024 the year we deliver this change.

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For more analysis download a copy of the white paper here.

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